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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16559
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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How do I treat gains on the sale of a house originally acquired

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How do I treat gains on the sale of a house originally acquired in a 1031 exchange?

Customer:

Thanks for asking your question! I'm sorry to hear about your tax issue and I'm going to try my best to help you understand or resolve it.

Customer:

How are you today?

Customer:

The gain on the sale of a house acquired in a 1031 exchange is the same as any gain - your sales price less your basis.

Customer:

Your basis in the new property is the basis of the previous property plus boot received

Customer :

I guess I don't understand can you make it simpler?

Customer:

When you gave up old property for new property the tax book value of that property transfers to the new property

Customer:

So, if you had a house that originally cost $500,000 and you took $200,000 of depreciation, the basis in that house is $300,000. You then trade for another property, plus you pay $100,000 for the new property.

Customer:

Your basis in the new property is $300,000 plus $100,000

Customer :

The property I sold was in Alaska, The property I bought was in Az. Then I sold the Az.property . The property in ak was a rental, and the property I bought in az I rented seasonaly for 3 years. I then lived in it as my second home before selling it

Customer:

How long did you live in it?

Customer :

4 months a year for 3 rears

Customer:

So it won't qualify for the principal residence exclusion. You would need 24 months in 5 years for that.

Customer:

Your gain on the sale of the house in Arizona is whatever basis you had in the house in Alaska less any depreciation you took

Customer :

Don't want to use it as principle residence as I plan to sell my ak. home and use that exclusion this year. I consider myself an ak. resident and have been for 34 years

Customer:

That's fine.

Customer:

So your gain will be the difference between what you sell the property for, and its basis

Customer:

which your basis will be what you paid for the original property in alaska, less depreciation taken both on the alaska home and the home in arizona

Customer :

I did write this prop. off as a rental for the first 3 years. do I subtract that from the basis?

Customer:

Yes

Customer:

Then, the amount of the gain that is attributed to depreciation will be recaptured

Customer :

Explain again what I use as a basis for this house. I paid 135K and sold it for 189k

Customer:

Then you would take $135,000 minus depreciation you took.

Customer:

Then take that result, and subtract it from $189,000

Customer :

What about the first statement you made about the basis I had in the Ak prop. plus any "boot???"

Customer:

Boot would be if you exchanged property and then paid additional money for the replacement property

Customer:

so if you traded your alaska home and paid $100,000 for the house in Arizona then you would add $100,000 to the basis

Customer:

That's called 'boot' in the tax world - don't ask me why

Customer :

So essentially I didn't exchange property, I sold one and bought another and went thru the 1031 exchange dprocess to defer any gains at the time of the orig. ak sale

Customer:

yes, and you would recognize those gains now

Customer:

at the sale of the replacement property

Customer :

The gains of the az fproperty right? not the gains on the ak. property as well?

Customer:

when you do a 1031 exchange you don't recognize the gain at the time of the exchange

Customer:

then, when you sell the replacement property you recognize the gain

Customer :

The az. gain or both gains?

Customer:

Both

Customer :

I thought if I lived in it for 2 years the ak. gain would be forgotten

Customer:

You said you only lived in it for 4 months out of the year

Customer :

correct but it was my secondary residence

Customer:

You have to live in the house for 24 months

Customer:

You only lived in it for 12 months

Customer :

Even if it is a secondary residence or does it have to be my primary residence

Customer:

has to be primary residence, and you have to live in it for 2 full years. That's 24 months

Customer:

if you lived in it 24 months during a 5 year period then you can exclude the gain

Customer :

sO EVEN IF I HAD FULFILLED THE 24 MONTHS BUT IT WAS A SECONDARY HOME, i'D BE SADDLED WTH ALL OF THE CAPITAL GAINS

Customer:

correct

Customer :

I guess that wasn't the answer I hoped for. The ak prop. was a rental too so I have to deduct the depreciation from the basis as well?

Customer:

Yes.

Customer :

Why did I even go through the 1031 exchange process?

Customer:

To defer your gain until the sale of your replacement property

Customer:

You didn't have to pay tax on the gain when you sold the original property

Customer:

So theoretically you could defer gains indefinitely if you kept exchanging property

Customer :

But I have to pay it now along with the gain on the AZ. property too right?

Customer:

yes, because your basis in the old property transferred to the new property

Customer :

it's over my head. I guess i'll have to take your word for it

Customer:

I would suggest having a tax professional handle your tax return

Customer :

Thanks

Customer:

Because this can be hairy

Customer :

Okay

Customer:

If you're satisfied with the answer, please feel free to rate my service as "excellent" to ensure I get credit for assisting you.

Customer:

Thank you for your positive rating ... please come back and see us any time you have a question. Have a great night!

Megan C and other Tax Specialists are ready to help you
Thank you Dan for the positive rating. Please come back and see me next time you have a question. It was a pleasure working with you today. I hope you have a great day.

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